Sunday, December 28, 2014

In Florida, there are three recognized states of real
property ownership. First is Tenants in Common in which each party owns a
distinct interest of the real estate, generally 50-50 if equally shared but ownership
can be in any percentage or multiple percentages if there are more than two
owners. If the deed is silent on the
percentage of ownership, the shares are always deemed as equal. Upon the death
of anyone owner, the interest of that deceased owner passes to that owner’s
heirs at law.

The second
estate is called Joint Tenancy, in which each owner owns the entire estate
together and is distinct from Tenants in Common. If properly created, the
interest of a deceased owner passes to the surviving joint tenant. In Florida, because a simple joint tenancy is
deemed to create a tenants in common relationship it is crucial that the deed
state “joint tenants with full rights of survivorship and not tenants in common”
to make sure the intent of the parties at the time of creating the estate is
met. Creditors of one of the joint
tenants can lien and attach the joint tenant’s ownership interest, and upon
foreclosure the purchaser of the property at the foreclosure sale becomes a
tenant in common with the other owner, breaking the joint tenancy.

The third
estate is called Tenants by the Entireties and is reserved to married couples in
the state of Florida. In addition to
having a survivorship benefit like a joint tenancy, the Tenants by the
Entireties estate also prevents the creditors of one owner from reaching the
interest held by the other owner.

Under current
Florida law, gay marriage is not recognized, and therefore gay couples who are
legally married in other states cannot take advantage of this type of
estate. At the beginning of next year,
the legal stay currently in effect regarding gay marriage will expire and it is
possible that marriage certificates will be issued to gay couples while the
case challenging the Florida constitutional prohibition on gay marriage is
appealed. It would appear that if a gay couple obtains a marriage certificate
then they will also be eligible to hold real property as Tenants by the
Entireties.

Under Florida
real property law simply stating “husband-and-wife” or “his/her spouse” after
the grantee’s name in any deed creates the Tenants by the Entireties
estate. No case has addressed whether
stating “husband and husband” or “wife and wife” will be sufficient to create
the desired estate. Therefore it is recommended the any deeds delivered to a
gay married couple state with specificity the intent to create the Tenants by
the Entireties estate. In addition, due to the uncertainty of the law, I would
recommend also adding the following to any deed created while the gay marriage
ban is appealed: “In the event it is determined that the Florida constitutional
ban on gay marriage is constitutional, and the marital status of the grantees
hereunder is voided, is the intent of the parties to create a joint tenancy
with full rights of survivorship and not tenants in common.” Otherwise, if the estate is not created
properly, the estate would revert to Tenants in Common which would not
effectuate the right of survivorship that most couples desire.

Please also
note that to create joint tenant estate or the tenant by the entireties estate
certain elements must exist at the time of the conveyance as follows:

1. The owners must acquire the property at
the same time;

2. The owners must have the same title to
the property;

3. The owners must have an equal share in
the property; and

4. The owners must have equal right to
possession of the property.

Therefore,
even if a gay couple currently owns Florida property jointly with their
significant other, or were married in another state, the fact that the ban on
gay marriage may become unconstitutional does not automatically create the
Tenants by the Entireties estate. This also applies to couples who acquired
property together before marriage and then thereafter became married, or who,
prior to marriage, only held title in one of the spouse’s names.

In order to
rectify the situation, it will be necessary for the owners to reconvey the
property to themselves with the proper vesting language. For example, if Mary and Jane Smith acquired
property in 2005 as joint tenants with right of survivorship, and legally
become married in Florida after January 2015 they would have to execute a new
deed to themselves conveying the property and asserting the creation of the
Tenants by the Entireties estate. If only Mary Smith owned the property prior
to the legal marriage, she would have to convey the property to both herself
and Jane Smith to create the estate, and, if the property was there homestead,
Jane Smith would have to join in the deed as the spouse of Mary Smith to clear
her Homestead interest.

Many
unmarried couples whether gay or not, who later become married, will find out
the hard way that that deed which conveyed title to their property did not
result in the survivor owning the property after their co-owners demise, but
instead allowed the heirs of the deceased spouse to inherit. If you own
property with another person which was acquired before marriage, you should
take action to ensure that your interests are protected and that your intent to
provide for survivorship is legally enacted.

Michael J Posner,
Esq., is a partner in Ward Damon a mid-sized real estate and business oriented
law firm serving all of South Florida, with offices in Palm Beach County. They specialize in real estate and can assist
owners in drafting deeds and trusts to insure proper transfer of assets. They can be reached at 561.594.1452, or at
mjposner@warddamon.com

Friday, October 24, 2014

For years, clerks of courts, lenders and Realtors®
have talked about e-execution and e-recording, heralding the move from paper to
purely electronic forms, but for the most part the industry has resisted, with
many concerns regarding security, validity and fraud. Tests have been held, a few loans closed with
electronic signatures, but for the most part closings are done the same way as
always, a closing agent prepares and prints the seller and buyer documents and
the bank prepares the much larger paper loan package. In fact, the only nod to modernity is that
instead of mailing or overnighting the 50 to 100 page loan package, printed at
the lender’s expense; it is now sent electronically to the closing agent so
they can print at their expense.

Well another
milestone has been reached as Palm Beach County has joined most other Florida
clerks in moving toward e-recording.
Traditional recording required bringing the original document to the
Clerk of Court who would stamp the document with a Clerk’s File Number and an
Official Records Book and Page Number, then review the document, enter the
pertinent information into the Clerk’s grantor grantee index, scan (or in the
old days, photograph for microfilm or microfiche), place online for viewing
(except documents deemed impermissible for online viewing such as custody and
divorce documents), and then mail back the originals to the party listed on the
document.

Under the new
system, a registered title company, attorney or closing agent will log in to
their online account with a private approved vendor, fill out the grantor
grantee index, scan the original document to be recorded, and upload the
document to the vendor who will then transmit the document to the Clerk to be
recorded. The Clerk’s office will review
the incoming documents, and then record same in the Public Records. Unless the Clerk’s office is diligent in
reviewing the uploads, I expect far more index errors arising, as untrained
processors input party names with misspellings, backwards (first name last) or
in the wrong location (buyers as sellers, etc.). Without a proper index, the Clerk’s own
database becomes useless as a tool for searching.

The Palm
Beach County Clerk’s office is touting this new system as both a money and time
saver. They claim documents will be
recorded faster, that courier fees paid to deliver documents to the Clerk will
be eliminated and that less fraud due to gap issues will be obtained. The Clerk does not mention that they can also
cut their budget by eliminating employees from their recording departments, but
that is an issue for another day.

While in
theory these claims are true, in practice they may not always pan out. First, while it is true that e-recording will
eliminate courier fees, the cost is simply replaced with new private vendor
recording fees of about $5.00 per document to record. So to record a more complex closing with a
deceased seller, the e-recording fee will likely exceed the average courier
cost of about $19.00 to $25.00 for one file to simply deliver the same
documents to the Clerk. In addition, for larger closing agents, sending ten
closings in one day by courier will be far cheaper than e-filing fees. Of
course, these new costs will simply be passed onto the buyer and seller.

Gap issues
have always been a risk that title companies assume. It is the window between the last available
title search and the recording of the instrument that is being insured, when a
title problem, defect or fraud can occur without notice. This window is usually five to ten days long
depending on the county. While the clerk
may update their records to within a few days, title agents do not rely on the Clerk’s online
database to search and examine title.
Instead, they use their title underwriter’s abstract plant to search and
update title. Therefore, the alleged recording
speed (by a few hours, at most) will not reduce gap issues.

Finally, we
come to the million dollar question of original documents. With e-recording, it will be possible for
less than scrupulous closing agents to record copies of executed documents
without possession of the original. With
time pressures to close, a closing agent waiting on the return of the originals
may succumb and file a scanned copy to get the deal done. If the originals are different or never
arrive (or are never sent), how valid will these recorded documents be without
proper verification. This will likely
lead too many cases being filed over disputed e-recorded “originals,” and more
lost note/mortgage claims than ever before.

While I am
all for technological advances, doing things just because we can is not always
the best course, and touting systems without mentioning the risks and downside
is always a dubious way to promote a new method of doing a traditional
task. I for one hope they are more right
than wrong.

Michael Posner, Esq.,
is a partner in Ward Damon a mid-sized real estate and business oriented law
firm serving all of South Florida, with offices in Palm Beach County. They specialize in real estate law and
business law, and can assist owners in buying and selling real property. They can be reached at 561.594.1452 or by
e-mail at mjposner@warddamon.com

Saturday, September 20, 2014

Purchase money financing or seller financing has been a
traditional tool of investors and owners to expand the pool of buyers for their
residential owner occupied real property. Many buyers have the ability to put
money down or the ability to make monthly payments, but not the ability to
qualify for institutional bank financing. This includes recently foreclosed
homeowners who have now gotten back on their feet and desire to purchase a new
home or those whose existing debt pushes them slightly above the “quality
mortgage” requirement of a 43% debt to income ratio. If these buyers still want
to buy a home their only option is borrowing money from either the seller or a
“hard money” lender. Since “hard money”
lenders frequently charge interest in the double digits, many buyers look for
seller financing as a way to acquire a home, build credit and eventually pay
off that loan by obtaining bank financing.

In Florida,
when a seller finances the purchase of a property, the mortgage is labeled a
“true purchase money mortgage.” This is to distinguish between financing
provided by any third party, which is simply a “purchase money mortgage.” These seller loans are also sometimes
referred to as “Vendor’s Lien.”
Traditionally, seller financing usually has the following terms:

1. Short term of 2 to 5 years;

2. A balloon payment at the end of the loan
period;

3. No review of the borrower’s ability to
repay the loan, instead relying on the borrower’s down payment;

4. Monthly payments of interest only or a
loan amortized for less than 30 years;

As a result
of the recent real estate collapse, Congress adopted a new law known as the “Dodd-Frank
Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). One of the consequences of Dodd-Frank is that
now all seller financing is regulated by, and subject to, strict new rules
adopted under the Act. Depending on certain factors, it may be impossible for a
seller to provide true purchase money financing to borrowers because of the
restrictive requirements.

These
requirements include that (i) the note cannot contain a balloon payment; (ii)
the seller as lender must qualify the borrower in the same manner that an
institutional lender qualifies a borrower for a loan; (iii) the interest rate
must be fixed for at least five years and thereafter may only adjust two
percentage points a year with a maximum of six percentage points; and (iv) the loan
must have a term of 30 years. Given these restrictions, very few, if any,
sellers will provide financing, which will either reduce the pool of potential
buyers or drive the few buyers who can get financing only into the arms of
institutional lenders. This will also result in sellers losing a secured loan
paying 5 to 10% interest and instead be forced to deposit their sale proceeds
in a money market account earning less than 1% with an institutional lender.

In
recognizing the problems with these restrictions the Consumer Financial
Protection Bureau adopted certain rules which loosened the restrictions on
individual seller financing for one property in a 12 month period. These rules
allow for a balloon payment and the seller does not have to qualify the
borrower for the financing. The other rules still remain in effect. This means all seller financing that
qualifies under these exceptions must still be amortized over 30 years and must
still contain a fixed interest rate for the first five years with limitations
on adjustments thereafter.

In adopting
these new rules, sellers must keep in mind that they do not apply to sellers
who constructed the home or if the seller is not an individual or trust. Many
investors purchase property in a limited liability company. If that company is
going to finance the sale, even if it is the only sale in a 12 month period, the
rules described above apply without the exception.

These new
rules will act to put a severe damper on private financing of residential owner
occupied property. It will result in fewer sales, drive otherwise eligible
borrowers to institutional financing, and cause hardship borrowers to lose
their homes because many small time “hard money” lenders make only a few loans
to residential borrowers in a year, and will no longer be willing to lend with
these restrictions.

The
Dodd-Frank restrictions are onerous and unwarranted and act as a substantial
intrusion on private transactions. This is clearly the law of unintended
consequences. While most of the Dodd-Frank rules relate to institutional
lenders, the inclusion of the private seller financing restrictions is likely
to cause substantial damage and expose those who finance owner-occupied
residential property to claims by defaulting borrowers who are looking for any
angle to avoid foreclosure.

Michael J Posner,
Esq., is a partner in Ward Damon a mid-sized real estate and business oriented
law firm serving all of South Florida, with offices in Palm Beach County. They specialize in real estate law and can
assist private lenders and sellers in all legal matters. They can be reached at 561.594.1452, or at
mjposner@warddamon.com

Saturday, August 30, 2014

One big issue
in the mortgage foreclosure world is the issue of the statute of limitations.
Under Florida law mortgages that have expired for more than five years after
the maturity date are deemed unenforceable. The legal question was whether
mortgages that were in default for more than five years before a new
foreclosure action was filed were actually enforceable.

For example,
a mortgage that went into default in 2007 and which had a mortgage foreclosure
case filed in 2009 that was dismissed in 2011 with a new foreclosure case filed
in 2014 six years after the acceleration notice was sent could have been found
to be wiped out by the statute of limitations. Two appellate courts have
reviewed cases with similar facts and have ruled that only payments that are
more than five years delinquent are actually wiped out but the mortgage is
still valid for the remaining sums due. These decisions balance the equity of a
late filed foreclosure with the inequitable position of basically giving people
free homes by not allowing the lenders to enforce otherwise valid mortgages.

It is very
likely that this case will eventually be decided by the Florida Supreme Court.
Given that two courts have held that the old mortgages are enforceable, it is
very possible Supreme Court will agree, ending this legal debate.

Deficiency Judgments

Last year the
Florida legislature amended the statute of limitations for deficiency judgments
from five years to one year. This was due to the uncertainty caused by the
five-year statute of limitations. As a result of the new law, lenders must
bring an action to seek a deficiency judgment within one year after obtaining a
foreclosure judgment. Prior to the new
law, there were very few deficiency actions pending in residential
foreclosures. However, recently there has been a substantial uptick in the
number of deficiency actions filed especially by one law firm located in Texas.

The law firm
of Dyck-O'Neal, Inc. has filed over 200 deficiency actions in the last several
months. Many of these actions have caught homeowners by complete surprise
believing that their foreclosure nightmare was over. The deficiency arises when
the home that is foreclosed is worth less than the amount owed to the lender.
After foreclosure, a lender has the option of either forgiving the deficiency
in which case the homeowner may have tax consequences resulting from such
forgiveness or the lender may proceed to obtain a money judgment for the
difference.

In many
cases, companies have purchased the right to pursue a deficiency judgment from
the original lender at pennies on the dollar. They then pursue the former
owners, many who have moved on and may even be in a position to pay money
towards a deficiency judgment. In addition, once judgment is obtained it is
like any other judgment in that wages and bank accounts can be garnished and
property that is not protected can be foreclosed.

Cash for Keys

With the
growing emphasis of preventing foreclosures many institutions and servicers are
willing to work a deal with homeowners who have been in foreclosure for many
years to basically trade the mortgaged home for what is commonly known as cash
for keys. Basically, if the homeowner only has one mortgage, and no other liens
or judgments, a homeowner can execute a deed in lieu of foreclosure to the
lender which would end the foreclosure action. This would transfer title to the
property to the bank. As an incentive, the bank pays the homeowner and agreed
sum which the homeowner may use to pay relocation expenses. In addition, in
many cases, the bank agrees to waive any deficiency.

The move out
incentive varies from case to case and can be anywhere from $3000-$20,000. In
addition, the homeowner avoids having a foreclosure judgment against them which
may enable them to obtain a new home mortgage sooner than they could if a foreclosure
judgment is entered. Finally, many lenders will even allow a homeowner to
remain in possession for a period of time after the deed in lieu is executed in
exchange for the homeowner’s agreement to maintain the property.

Shutting down phony trusts and class action companies

At the height
of the foreclosure crisis, many unscrupulous companies took advantage of
homeowners who are facing foreclosure claiming that they had the secret to lower
or eliminate mortgage debt. The first scheme involved transferring the property
to a trust with the trust then suing the bank seeking to quiet title. Few
lawsuits were actually filed and most were dismissed in favor of the bank.
Another scheme involved claims of filing a class action lawsuit on behalf of
multiple homeowners seeking to punish lenders for their aggressive lending
tactics with the goal of lowering or eliminating the mortgage encumbering the
consumer’s property. Again, few cases were filed with most of the efforts of
the companies involved centering around hard sell tactics to obtain homeowners
payment rather than pursuing legal actions.

The Florida
Attorney General has aggressively pursued these cases shutting down the most
egregious trusts and recently the Florida Bar has commenced proceedings against
the Hoffman Law Group, a law firm in North Palm Beach that has taken
substantial sums from consumers as part of their attempts to file class-action
lawsuits. It appears very little success
has come from the law firm’s actions, and many homeowners are out thousands of
dollars.

With the
recovering economy, and the increase in the value of many homes, the number of
foreclosures has declined but there still is a substantial volume in process
and may take many years for the levels to return to pre-crisis numbers.

Michael J Posner,
Esq., is a partner in Ward Damon a mid-sized real estate and business oriented
law firm serving all of South Florida, with offices in Palm Beach County. They specialize in real estate law and can
assist lenders and banks in all legal matters.
They can be reached at 561.594.1452, or at mjposner@warddamon.com

Monday, July 21, 2014

Another year
and another round of tweaking to Florida’s Homeowners Association Act (Florida
Statutes Chapter 720) and the Florida Condominium Act (Florida Statutes Chapter
718) have been enacted. The new laws
were signed by the Governor on June 13, 2014 and went into effect on July 1,
2014. The new law is not very expansive
but did clarify a few issues and expanded certain rights. Please note that the laws do not necessarily
apply equally to both condominiums and homeowners associations, as a
legislature continues to modify the applicable chapters inconsistently.

Under current
law, a Condominium Association has certain right to access a unit owner’s unit,
“when necessary for the maintenance, repair, or replacement of any common
elements” and “or as necessary to prevent damage to the common elements or to a
unit.” Due to foreclosure, many units in
Florida have become abandoned and the legislature took notice of this issue and
expanded Florida law to grant an additional right of access to a Condominium Association
when a unit is abandoned by the unit owner.
Prior to access, the association must determine that the unit is
abandoned and give the owner at least two days’ notice prior to access. This
new right includes the right of the Association to turn utilities on and to
inspect for and repair mold.

The insurance
provision of the Condominium Act has been clarified to address non-insurable
events. These are events that are either not covered by insurance or maybe for
a loss of less than the minimum deductible of the Association’s insurance
policy or for loss or repair due to ordinary use. The coverage of these losses
to condominium property is now determined by looking at the declaration of
condominium for the specific condominium in question.

In clarifying
the right of the Associations to create a directory containing the name and
address of each unit/homeowner the statute includes a provision that allows for
multiple phone numbers to be listed, with the right to opt out still retained
by each unit/homeowner by sending written notice to the Association. In
addition, the Association may, with the consent of each unit/homeowner, include
additional information in the directory, presumably the electronic mail address
or other information that the unit/homeowner is willing to disclose to other
owners. This provision is applicable to
both Condominium and Homeowners Associations.

A current
problem in many Condominium Associations is the transfer of power from one
board to the next. The law will now require the outgoing board to turn over all
official records in their possession within five days of the election of the
new board. In addition, the Bureau of Condominium may impose civil penalties on
those who fail to cooperate with this requirement.

In
recognizing the greater use of electronic mail, the Condominium Act has also
been expanded to allow board members to communicate via email with other board
members without creating a quorum which would require a meeting open to all
members. No voting is permitted by electronic mail.

In order to
address a recent case that held that unit owner is not liable for previous
owner’s assessments if the Condominium Association had foreclosed or took title
to a unit, the statute now provides that a current owner is liable for
assessments of the previous owner except for the period in which the
Association held title to the unit. This commonly occurs when Association
forecloses then subsequent to that foreclosure the bank forecloses and either
the bank or a third-party obtains title from the bank foreclosure. This provision was added to the Homeowners Association
Act in 2013.

In order to
provide access to Homeowner Association meetings to disabled persons, the Act
was amended to require Associations to provide disability access if requested
by a handicapped person who is entitled to attend the meeting.

An entirely
new section was added to the Homeowners Association Act to address issues
arising from an emergency situation. For purposes of this change, which is very
similar to a previously enacted law affecting condominiums, an emergency is
defined as a state of emergency affecting the area in which the association is
located as called by the Governor. The difference between the Homeowners Association
statute and the Condominium statute is that the Homeowners Association does not
gain the right to access individual homes, a right that the Condominium
Association retains.

Overall, the
revisions were mostly minor and, in part, to clarify existing law or to unify
certain parts of both Acts. Presumably, were substantial changes will be
addressed by the legislature in upcoming sessions.

Michael Posner, Esq.,
is a partner in Ward Damon a mid-sized real estate and business oriented law
firm serving all of South Florida, with offices in Palm Beach County. They specialize in real estate and can assist
community associations in all legal matters.
They can be reached at 561.594.1452, or at mjposner@warddamon.com

Saturday, June 21, 2014

All professions, be doctors, lawyers or baristas, have a
secret language or code, which serves to both assist the profession by
providing shortcuts for immediate explanations, but also to act as a barrier to
entrance and to make the profession appear more important and above the normal
person. Lawyers are especially not
immune to that view and the secret language of lawyers is a mixture of Latin,
Old French and Old English. While law
schools these days try and teach “Plain English for Lawyers,” all new initiates
seek to model their behavior like their peers, so the strange words continue to
be used. Here are some of the most
popular still used by lawyers in the real estate world.

Lis Pendens: A Latin phrase for notice of a pending
suit. Whenever an action involving real
property is filed, a Lis Pendens must also be filed to notify all parties that
an action involving a specific property has been commenced. Unlike pleadings, the Lis Pendens is also
recorded in the public records and allows the lawsuit to have priority over
subsequently filed liens, mortgages or other land interests (assuming the party
that filed the Lis Pendens prevails).

Ab Initio:
A Latin phrase that means from the start or beginning. Useful for conveying, at a later date, that
an obligation was meant to commence or was invalid at a certain point. For example, a defective contract (missing a
signature or key element) is often said to be void ab initio.

Caveat Emptor: A very popular Latin phrase for Buyer
Beware. In residential transaction, the
Florida Supreme Court has held it no longer applies (imposing a duty on
seller’s to disclose material information that affects the value of the house),
it still is prevalent in commercial transactions, as well as many contractual
arrangements (as they say, always read and understand the fine print, or get a
lawyer).

Allonge: An Old French law term that means to draw out. In common terms it is the endorsement on a
negotiable instrument, such as a promissory note or a check (yes, when you sign
your name on the back of a check you are creating an allonge in blank in favor
of the bank which is cashing or depositing the check. The phrase “Pay to the Order of XXX” is a classic example of an Allonge.

Tenements, Hereditaments and Appurtenances,
oh my: Latin phrases used in deeds to convey the bundle of rights in real property.
Tenements grant the right to hold the
land (as opposed to own, which is reserved for the King); Hereditaments grants the right of inheritance, used so that the
land conveyed goes to the buyer and their heirs; and Appurtenances are the improvements and fixtures attached to the
land. An example is from a quit claim
deed as follows: “TOGETHER with all the tenements, hereditamentsand
appurtenances thereto belonging or in anywise appertaining and all the
estate, right, title, interest, lien, equity, and claim whatsoever of said
Grantor, either in law or in equity, to only the proper use, benefit and behoof
of said Grantee, his heirs, successors and assigns forever.”

et al.: A
Latin abbreviation for et alii, it
simply means “and others” and is used as a useful shortcut to avoid having to
list all parties to an action or contract.

Chattel: Not to be confused with cattle (which are a
form of chattel), it is an Old French Law term meaning personal property. Mostly archaic, occasionally still used to
describe personal property or car loans such as a Chattel Mortgage.

Ultra Vires: A Latin phrase meaning “beyond power,” it
commonly comes up in disputes over corporate or substitute party actions as
whether the act of the corporate officer or attorney-in-fact was beyond their
legal authority. Ultra vires actions are unenforceable. In real estate, the use of powers of attorney
are often subject to ultra vires
attack, when actions are taken (sale or pledge of property) and the original
owner contends that they did not grant that power to the attorney-in-fact.

Hypothecation: A Latin phrase to pledge collateral. A mortgage on real property or chattel is a hypothecation. In Spanish, the word for mortgage is hipoteca, derived from this Latin word.

Fee Simple: Derived from the Latin term fief, was a feudal right granted by a
king or lord to allow use of lands in exchange for allegiance (which evolved
into paying taxes). Eventually came to
mean the right to own, mortgage, sell and devise land without a higher
authority claiming an ownership interest.
Most property interests today are conveyed in fee simple.

Knowing a few
Latin phrases can make you a hit at your next cocktail party. Just remember in vino veritas (in wine, truth) before you claim to be an expert
in Latin. There are lawyers everywhere
ready to out Latin the layman.

Michael J Posner, Esq., is a partner in Ward
Damon a mid-sized real estate and business oriented law firm serving all of
South Florida, with offices in Palm Beach County. He is Board Certified in Real Estate Law and
can assist sellers, buyers and community associations in all real estate matters. He can be reached at 561.594.1452, or at
mjposner@warddamon.com

Tuesday, March 18, 2014

(Part 3)

In the last two issues we looked at several different methods for
real property ownership, from tenants by the entireties, life estates,
revocable trusts and other methods allowed in Florida. These methods work for more basic needs but
when dealing with specialized issues such as asset protection, limiting
liability across multiple properties and foreign ownership, only ownership in
an entity can provide that extra protection, but with certain restrictions and
drawbacks.

Foreign owners who
would traditionally buy Florida property in their own name face substantial tax
and estate consequences on sale due to the Foreign Investment in Real Property
Tax Act and multi-jurisdiction probates.
Any sale to an investor or a sale over $300,000 requires withholding of
ten percent of the gross sales price regardless of profit or loss until a
withholding certificate is obtained. If
the property is held by an entity, this withholding can be avoided.

Entity ownership
instead of personal ownership can also serve as an estate planning tool. Instead of having a domestic probate and a separate
probate in Florida, the entity interest would be treated as personal property
and probated solely at home, with ownership of the real property remaining in
the entity.

Entity ownership
also limits liability from loss or damage due to issues at the property. Individual and trust ownership of rental
property exposes the personal owner to claims for loss, injury or damage in
connection with the property. For
example, if a tenant is hurt or dies at the property, the tenant or the
tenant’s estate can sue the owner and reach personal assets. If an entity is used, the tenant can only
look to what the entity owns (typically the property only) to recover
damages. While insurance can reduce this
exposure, entity ownership can reduce the need for excess coverage and the
costs associated therewith.

Traditionally the
most common form of entity ownership was the corporation. Corporations have existed for hundreds of
years, and are the best understood and most common form of ownership. However, corporate ownership has several
drawbacks from both a tax and reporting areas.
Corporations can be taxed as “C” corporations which is the default
status under Federal law. C Corporations
pay income tax on profits, and then the shareholders again pay tax on
distributions. These entities also are
liable for an additional Florida corporate income tax at a rate of 5.5%.

The alternative
tax status is an election to adopt “S” Corporation status. S Corporations do not pay either federal or
state income tax on profits. Instead,
these entities are deemed a pass through, with all taxes paid at the
shareholder level. However, this
election is restricted, as “S” corporations cannot generally have entity
shareholders, foreign owners or trust owners.

Another
traditional entity for real property ownership is the limited partnership. Limited partners, like shareholders, have no
personal liability beyond their investment in the partnership. However, the general partner of the limited
partnership does have personal liability (though most general partners today
are, in fact, corporations or LLCs).

To avoid the
problems inherent in corporations and partnerships, a new entity was created
called the limited liability company. Beginning
in Wyoming in 1977, the LLC is now valid in all states. The LLC combines the
limited liability characteristic of a corporation with the pass through tax
treatment of a partnership. LLCs can be
owned by foreigners, can have entity ownership for multi-layering (meaning the
members of the company can be another entity, including a foreign owner), and
have no limit to the number of owners.

LLCs are generally
less complicated than partnerships and corporations, with only two layers of
management (members and managers), and require less paperwork and meetings to
maintain viability. This lowers the overall cost of formation and operation. Delaware has even created a specialized LLC
called a serial LLC which allows for one parent LLC with a single tax id number
and accounting to have multiple LLC children, with the benefit of limiting
liability to each child LLC. This is
extremely useful for owners of multiple rental properties. Florida has not approved this format but I
expect it to be adopted in the future.

While entity
ownership has its benefits, it is not always the best approach. Financing can be more difficult to obtain,
and insurance costs can be affected. Choosing
the proper form of ownership requires planning and consultation with tax and
legal professionals. Failure to properly
plan can cause substantial problems after purchase.

Michael J Posner, Esq., is a partner in Ward Damon a mid-sized real
estate and business oriented law firm serving all of South Florida, with
offices in Palm Beach County. They
specialize in real estate and entity ownership and can assist sellers and
buyers in all real estate and entity matters.
They can be reached at 561.594.1452, or at mjposner@warddamon.com

About Me

I am a Florida Board Certified Real Estate Attorney with 30+ years of residential and commercial real-estate experience.
I am an equity partner in Ward, Damon, Posner, Pheterson & Bleau, a mid-sized law firm serving all of South Florida, with three offices in Palm Beach County. Our firm specialize in and can assist in buying, borrowing and selling property throughout South Florida. I can be reached at 561.594-1452, mjposner@warddamon.com or www.warddamon.com